TPG Scores in Its Sale of Shenzhen

By RICK CAREW HONG KONG -- TPG has reached a deal to sell its controlling stake in Shenzhen Development Bank to China's No. 2 insurer for $1.68 billion, marking a successful exit for one of the private-equity industry's more notable investments in China. Ping An Insurance (Group) Co. of China agreed to take control of Shenzhen Development, one of China's 10 biggest banks, by subscribing to as much as $1.6 billion worth of new shares issued by the Chinese bank in a private placement and then buying TPG's 17% stake. TPG has the option of receiving payment in cash or receiving a 3.9% stake in Ping An. TPG must decide whether to exercise the option to take shares or cash before Dec. 24, 2010. The deal, which the Wall Street Journal reported last week was close to agreement, is contingent on regulatory approval. Nearly five years ago, TPG's Asian arm, Newbridge Capital, made a risky bet that it could turn around Shenzhen Development, which was saddled with bad loans and poor lending practices. The bet has paid off in a spectacular fashion. If TPG decides to take the cash option, the $1.68 billion it will receive is around five times the cash it invested, which consisted of an original outlay of $150 million in addition to between $150 million and $200 million that TPG later paid for warrants in the bank. TPG's investment didn't always run smoothly. The fund found itself at odds with China's securities regulators' plans to regularize the bank's share structure. Like most listed companies, Shenzhen Development had certain shares deemed "nontradable," and making them tradable required tricky negotiations. While TPG waged a controversial public campaign against the preference of regulators to give away free shares to small shareholders as part of a deal, TPG eventually agreed to just that. TPG struggled to raise capital levels at Shenzhen Development to reach regulatory requirements, given the bank's legacy of bad loans. In 2005, TPG struck a deal to sell a $100 million stake in the bank to General Electric Co., only to see it expire after delays over the share-reform dispute. As time dragged on, a run-up in Shenzhen Development's share price amid a broad rally in China's domestic markets made it impossible to renegotiate a deal after the original terms looked too cheap. But despite its problems, TPG's investment paved the way for much larger outlays by foreign investors in China's banking sector that included Bank of America Corp., Goldman Sachs Group Inc. and Royal Bank of Scotland PLC. Most of these have sold off or reduced their Chinese bank stakes this year at a profit as they rebuild balance sheets battered by the financial crisis. Under the terms of the deal announced over the weekend, Ping An agreed to buy between 370 million and 585 million new shares in Shenzhen Development for 18.26 yuan ($2.67) apiece, the average of the bank's shares over the last 20 trading sessions. Ping An is offering to pay 22 yuan a share for TPG's stake. Ping An's stake is expected to rise to 30% under the deal from the 4.68% stake in Shenzhen Development it currently holds. Shenzhen-based Ping An, the country's second-largest insurer by premiums after China Life Insurance Co., is a natural buyer for the stake. Beyond sharing the same hometown, acquiring a bigger stake in Shenzhen Development will help the insurer further branch out into banking. Ping An Chairman Peter Ma envisions turning the insurer into a diversified financial conglomerate by beefing up its banking and asset-management businesses. Ping An made an ill-timed investment in Fortis NV in late 2007 that cost it about $3 billion, and had to scrap a $3.4 billion deal to form an asset-management joint venture with Fortis. Write to Rick Carew at rick.carew@wsj.com